Midwest's secretive and scrappy start-up scene

By Eric Markowitz | Yahoo Small Business

With roots in a rugged agrarian work ethic, start-ups are thriving around Omaha--thanks in no small part to big spenders' bankrolls. We sent a lifelong New Yorker to investigate the seedlings of Silicon Prairie.

I'm standing in the conference room of a 140,000 square-foot former furniture factory in North Downtown Omaha, Nebraska. Flecks of paint and upholstery dye dot the cinder-block walls. My tour guide--the owner of the building, Bob Grinnell--explains that this factory, The Mastercraft, takes its name from the furniture brand that had originally inhabited the space. It opened in 1941 and manufactured furniture for the better part of the 20th century. But a decade ago, the furniture business went belly-up. Investors in Iowa bought the company. The building was abandoned.

Grinnell, a successful electronics entrepreneur and Omaha native, bought the building in 2005. His idea was to refurbish the building, carve out offices, and rent it out to start-ups, artists, and creative small businesses. A trained master steamfitter, he'd save money by putting the piping in himself.

When the housing market crashed, commercial office space in Omaha took a nose dive. But Grinnell's timing was improbably lucky. Demand for creative space in Omaha is blowing up. In June 2011, Grinnell had five tenants. Today, there are 27.

There are photographers, interior designers, creative agencies, and start-ups. Over beers, Grinnell explains how the building's classic, factory-style saw-tooth roof, exposed-brick walls, and high ceilings foster a creative work environment. I look into the hallway and see a young woman in a red beret glide by on a scooter. A group from Des Moines has arrived for the tour as well; someone whispers, "Hey, doesn't this kind of remind you of General Assembly in New York?"

The building is 17 feet longer than the Titanic, and is nearly double its width. "There's room to grow," Bob says. "Omaha had a cell, but no nucleus. That's what Mastercraft is."

The "cell" Grinnell is referring to is Omaha's growing, yet somewhat clandestine, start-up community. When Sarah Lacy, the tech and start-up journalist and author, stopped by Omaha for her book tour in 2008, she remarked on her blog that she was "stunned and impressed by the creative vibe of Omaha" and that the creativity of the city "is far more of a central ingredient in Web 2.0 than any other Valley-centric tech wave."

Omaha, the 42nd largest city in the United States with about 410,000 people, is often considered the telecommunications capital of the country, and has a solid foothold in the finance industry, with major Fortune 500 companies such as Berkshire Hathaway, Mutual of Omaha, and TD Ameritrade. Available financial talent in the city—and its proximity to Des Moines—has made Omaha an attractive location for the next generation of financial services firms. Nearly half of PayPal's employees work and live in Omaha. Overall, the city's unemployment rate is half the national average.

It's not hard to find innovative start-ups quietly toiling away in the city, too. MindMixer is working on ways to reinvent how people connect with government online. SkyVu, an interactive game design firm, has built several blockbuster hits. There's also Sojern, which targets travelers for advertisers. More seasoned Web start-ups in the area include Hayneedle, an Internet retailer, and Proxibid, an online auction marketplace. There's even a growing artisan, handmade collective, led by the quirky Chris Hughes of Artifact Bag Co. You can click around this map (thanks to the team at Silicon Prairie News) for plenty more examples:

And yet, impressions like Lacy's of Omaha are common among coastal dwellers. With so much focus on San Francisco, New York, Austin, and Boston--cities with scores of venture-backed companies--who knew there was this start-up scene brewing in the Midwest?

How to Make the Midwest Mainstream

In 2008, Jeff Slobotski and Dusty Davidson conceived of Big Omaha, an inspirational start-up conference that attracts entrepreneurs and start-up enthusiasts from around the Midwest. Davidson had previously founded two start-ups--BrightMix and Tripleseat software--and Slobotski had been a community advocate in Omaha.

This year, the event has branched out. Attendees from 27 states and three countries have descended upon Omaha to hear speakers such as Jim McKelvey, co-founder of mobile payment system Square, and Seth Goldstein, co-founder of Turntable, a start-up that allows people play music together online. The conference attracts some 700 entrepreneurs, marketing executives, software engineers, social media people, and aspiring future founders. Like all conferences, they have come to be inspired, make connections, and enjoy a few days off from their normal routine. But there's something remarkably different about Big Omaha--a lightness or buoyancy--that seems patently Midwestern. Some have compared it to TED or SXSW, but the analogy feels weak. As I'm sitting in the back row of chairs on the first day of the conference, I notice that each speaker gets an uprorious standing ovation--both when they step to, and exit, the stage. Why does every speaker gets two standing ovations, I ask the guy sitting next to me. "That's just what we do here," he says. I have never felt more of a New Yorker.

Earlier in 2008, Slobotski had launched Silicon Prairie News, a TechCrunch-inspired blog meant to "to highlight and support the burgeoning entrepreneurial ecosystem on the Silicon Prairie," the "Prairie" being the geographic area in the Lower 48 bound roughly to the east of the Rocky Mountains, west of Chicago, north of Tulsa and south of Minneapolis. The blog profiles entrepreneurs, announces funding, and helps connect angel investors with local start-ups. Omaha, a four-hour drive from the continguous United States's geographic midpoint in Lebanon, Kansas, is literally smack-dab in the middle of the United States. It's also the farthest you can get in the United States from both Silicon Valley and Wall Street.

The news site started simply enough. Slobotski had been keeping a personal blog about his own interactions with start-ups. One day, Slobotski turned the camera on Dave Nelson, the founder of SecretPenguin, a branding and design agency in Omaha. Nelson, a professional skateboarder, told the story of creating his company, and Slobotski broadcasted it to the Web. It was a hit. But when Slobotksi tried to replicate video, he began to notice a quirky trend: It didn't sound like a TechCrunch story, where of so-and-so raised X amount of venture capital money. Founders in the Midwest were fabulously humble.

"It's an agrarian society," he says. "It's hard work, minute the sun comes up until it goes down. The result is the product of your labor, not how loud you talk or how much you brag about your stuff. It's a more results-driven, heads down, how-do-you-create things environment. And we're more focused on that, maybe to our detriment, that we don't balance that out with being proud of what we're doing. It's a stereotype but it's true."

Ben Milne, the founder of Dwolla, a cashless payment start-up based in Des Moines, sums up the mentality succinctly: "On a farm, it's simple. If it's broken, you fix it. That's how start-ups think here."

"We Don't Want To Be Secretive Anymore"

I ask Dusty Reynolds, the director of entrepreneurship at the Omaha Chamber of Commerce, to help explain this disconnect.

"It's hidden, but like a ninja," he says. "You know it has impact, you know it's doing some things, but it's hidden a lot of times. You don't know it's there until you actually see it."

He adds, in a somewhat lamenting tone, "It's secretive—but we don't want to be secretive anymore."

Skeptics point to the lack of talented programmers and capital markets, but those stigmas are generally unfounded and limited to the people living on the coasts, according to the people actually starting businesses in Omaha. Back at the conference, which is being held at The Kaneko, a sprawling dairy processing plant-turned-art-and-event space named for named for Jun Kaneko, the Japanese-born sculptor, I meet up with Gorden Whitten, a two-time entrepreneur and angel investor based in Omaha.

Whitten's current Omaha project is VoterTide, a social media intelligence company for political campaigns. "The money people perceive that you can't build a company in Nebraska. It's not true," he says. Whitten has made angel investments in about seven companies, all based in Nebraska. The one investment Whitten made in a California start-up failed.

But there is one undeniable hurdle: Nebraska is low on the venture capital food chain. In 2007, the state was ranked worst in the country for capital markets.

"There's something unsettling about the Cornhusker State ranking last in capital markets (dead last, behind pseudo-state Puerto Rico), but it's not difficult to see the underlying opportunity for Nebraska Global to make an immediate impact and improve that statistic," Nebraska Global, the investment fund, notes on its site.

Recently, several investors have set up shop in and around Omaha, including Capricorn investment, a multi-billion-dollar investment firm founded by eBay's first employee, Jeff Skoll. One of the firm's partners, Stephen George, grew up in Nebraska and moved back to invest in companies based in Omaha. His business card reads: "Palo Alto, Omaha, New York." In February, Capricorn led a $5.4 million Series A investment in Bloom.com, an e-commerce beauty start-up with more than 100,000 members, which was founded by Julie Mahloch, serial entrepreneur.

"People are realizing there are good opportunities here," Mahloch tells me over coffee. "There may not be as many deals, but the deals are good."

Mark Hasebroock, cofounder of Hayneedle, the Nebraska-based ecommerce company, launched Dundee Venture Capital in 2011 to invest in local start-ups. The Nebraska Angels, a group of successful business professionals formed in the spring of 2006 to make seed and early-stage capital investment in the range of $150,000 to $750,000.

Recently, Omaha was ranked eighth among the nation's 50 largest cities in both per-capita billionaires and Fortune 500 companies, according to USA Today. Sure, San Francisco leads the amount of billionaires per million people, and Atlanta leads in the number of Fortune 500 companies per 1 million people. "But no city, not even the major coastal giants, can claim a ranking as high as Omaha on both lists," the paper concluded.

While they may be wearing Levis and driving Camry's, the residents of Omaha are wealthier than average. The city also has a host of billionaires, including Ameritrade founder Joe Ricketts ($1.5 billion), Walter Scott ($1.2 billion) of Peter Kiewit Sons, and Berkshire Hathaway founder and CEO Buffett, who estimated wealth is more than $40 billion.

As the corporate baby-boomers from companies like Berkshire Hathaway slide into retirement, they're looking for ways to invest. When it comes to angel investments in start-ups, the problem is not lack of supply or demand on either end of the equation; the problem is, there's no marketplace.

Getting Founders to C'Mon Home

Sensing the growing start-up community and opportunity, some founders-to-be are already coming home. Paul Jarrett and his wife, Stephanie, are both originally from Nebraska, and lived in New York and San Francisco, where they worked in marketing and advertising. Last year, they moved to Silicon Valley to be part of the start-up culture and to be close to investors, but decided to move back home in April in order to launch their own start-up, Bulu Box, a monthly subscription service for vitamins. I ask them why they left the Valley.

"When you really sit back and look at it, the enthusiasm around here is why we came back," says Paul. "We were very conscious and aware in choosing the right investors. People here have a real friendliness, and they're easy to work with. There's a kind of support and collaboration."

There are also logistical factors. Commercial office space is about a third of the price that it is in San Francisco, and residential prices, too, are more affordable.

"We fought with it hard, but after talking with investors we realized moving here gave Bulu Box the best chance of survival," Paul said.

Slobotski's hope is that with the promotion of Silicon Prairie News and Big Omaha, entrepreneurs will be more willing to launch companies in the Midwest—and not leave for the coasts.

Silicon Prairie News hopes to bridge that gap, and promote the message of start-ups nationally, but more importantly, create awareness internally in the region to foster the investment in start-ups.

"I definitely think that people take a look around and kick the tires at least and realize there's a lot of emerging potential," says Slobotski. "People aren't hopping on the first flight to San Francisco anymore. There's a renewed sense of pride in our community."